The truth is in the cash flow

The Value of a Virtual CFO

Posted by on Jan 23, 2018 in Working Capital

The Value of a Virtual CFO

Last week, I was talking to Bankwest about working capital management.

Most readers will know by now that working capital is a particular interest of mine.

This is because working capital is the biggest single use of a trading business’ cashflow.

So, by efficiently managing working capital, a business owner will release cash.

Cash that can be used to fund growth.

Cash that can be used to give you, the owner, more control of your business.

Cash that can be used to pay a dividend.

A Virtual CFO is a uniquely cost-effective and flexible resource available to business owners interested in being more self-sufficient, confident about taking a risk and building a sustainable business.

My job is not to tell what to do, or even what not to do.

My job is to help you understand the likely financial outcome of your business choices.

I am your partner, not your keeper.

If you are wondering about the value a Virtual CFO can bring to your business then take a read of the conversation I had with Bankwest – there are some great tips on managing working capital that you can implement straight away.

If you’d like more individualised help, please contact me.

But t’was a famous Victory!

Posted by on Nov 1, 2017 in Leadership, Lessons from the Big End of Town

But t’was a famous Victory!

This is an article I wrote about CPA Australia on behalf of the Association of Virtual CFOs, and which was published by Smart Company.

I had watched with horrified fascination as CPA Australia tore itself apart over the last 12 months, egged on the by the Australian Financial Review.

Emotion had clearly over-whelmed reason, and in this article, I wanted to take an impartial look at what was happening.

The conclusions I came to were quite startling.

Financially, on a per member basis (itself a contentious subject) there was very little difference between CPA Australia and its major rival, CAANZ.

Yet, there was so much heat and noise from a dissident group of CPA members about how money was being spent.

And, when the dissident group “won”, they were not prepared. There was no plan, no clear idea as to the changes they wanted.

I think CPA Australia will rue the last 12 months for the next 12 to 24 months.

They will lose existing members, and if it is more than 7,500 then in all likelihood they will make a loss.

Fewer new members will join because of the damage to CPA’s reputation.

It will take time for the new board to take control, appoint a new CEO and in the meantime, the organisation will drift.

So, what are the lessons for business owners from CPA Australia’s implosion. Here are a few:

  1. Make considered, not emotional decisions.
  2. Before embarking on a course of actions have a plan.
  3. In fact, before embarking on a course of action, have several plans – Plan A, Plan B, Plan C etc.
  4. Never take your customer for granted. If you do, you invite disruption, like Uber and Taxis.
  5. Recognise that every threat is an opportunity – sometimes you need imagination to do this.

I hope you enjoy reading this article. It is fair to say that it was the one that received the most feedback and discussion when it was published.

If you think that impartial and thoughtful advice could help you take your business to the next level then please make Contact.

I can help.

T’was a famous Victory!


The Consequences of Choice

Posted by on Oct 30, 2017 in Leadership, Lessons from the Big End of Town

The Consequences of Choice

This is the third, and for the moment, final piece that I wrote on the subject of Murray Goulburn, on behalf of the Association of Virtual CFOs and published by Smart Company.

In it readers will discover how the problem of a budget with no basis in reality was compounded by a decision to make the most important stakeholder (their farmer suppliers) bear the brunt of that problem by unilaterally cutting their milk prices.

The consequence of these choices were:

  1. A collapse in Murray Goulburn’s milk supply as farmers left the industry or moved to another processor.
  2. A blow out in the cost of production as a consequence, impacting on Murray Goulburn’s competitiveness.
  3. Closure of three surplus milk factories.
  4. A loss of 360 jobs.
  5. Unwinding Murray Goulburn’s attempted clawback of milk payments and recognising it as an expense.
  6. Write downs of $410m, weakening Murray Goulburn’s financial position.

Business owners who read this case study will discover many lessons. Among them:

  1. In a crisis, work out which stakeholders are most important to the survival and recovery of your business.
  2. In a crisis, acknowledge your mistakes honestly/identify the core issue accurately.
  3. Formulate a plan to address the now accurately identified issues.
  4. Go to most important of those stakeholders with your plan and get their agreement to it.
  5. Move on to your next most important stakeholder with that plan and support in place.
  6. Recognise a crisis for what it also is – a chance to make needed changes to your business.
  7. Understand the key drivers of your business. The less you can control, the less risk you can take.

A Virtual CFO can help you with impartial and objective advice.

Unlike your external accountant, we work with you and your business regularly. We’ll help you make better, more informed choices.

If you’d like to find out how we can help, please Contact Us.

The Consequences of Choices


The Perils of Serving Two Masters

Posted by on Oct 26, 2017 in Lessons from the Big End of Town, Using Information as a source of Competitive Advantage

The Perils of Serving Two Masters

This is the second article I wrote on Murray Goulburn, on behalf of the Association of Virtual CFOs and published by Smart Company.

The background to this piece was an announcement of a full year profit for FY16 by Murray Goulburn.

At face value, this was a most unexpected outcome.

Remember, this was a business under so much pressure that it had slashed payments to its suppliers just a few month earlier.

Intrigued, I took a closer look at the Murray Goulburn result. The “devil in the detail” revealed some interesting pieces of “accounting magic”.

The main lesson for owners of small and medium size businesses is that your financial information is a source of competitive advantage.

When used properly, and with the right degree of granularity, your financials will tell you:

  1. Which aspects of your business are performing well.
  2. Which aspects are performing below expectations.
  3. Where to focus your attention to improve profitability and cash flow.
  4. The order in which to apply that focus.

If you’re not using your financial information to make informed decisions, or if you don’t know how to use your information in this manner, then please Contact Us.

We can help you.

The Perils of Serving Two Masters

Vaulting Ambition

Posted by on Oct 24, 2017 in Budgeting and Forecasting, Growing with Confidence, Lessons from the Big End of Town

Vaulting Ambition

This is the first of a series of articles I wrote about Murray Goulburn on behalf of the Association of Virtual CFOs and which were published by Smart Company.

At the time I was astounded by the scale of Murray Goulburn’s miss, and their subsequent decision to make the farmer suppliers wear the brunt of what was a monumental head office stuff up.

I also knew there would be a lot more to come on this story.

In the end, I wrote another couple of articles/blogs dealing with different aspects and lessons as the story unfolded.

For business owners, in this article, you will learn how to:

  1. Construct a robust budget.
  2. Use as your starting point your current position, key industry and economic drivers.
  3. Gauge the scale of the task to shift from your current to your planned position.
  4. Track key business drivers throughout the year to understand the likelihood of meeting budget.
  5. Decide when your budget needs to be revised.

The key lesson is that the point of a forecast is not to be “right”.

The point of a forecast is to reflect your business plan, so that when things don’t go as expected you can ask the following questions:

  1. Have we taken all the actions required by our business plan to achieve our forecast?
  2. If not, why not? When will those actions be completed?
  3. If we have, then what has changed in the market for our goods/services that we did not anticipate?
  4. What, if any, action do we need to take as a result of the answers to these questions?

To grow with confidence you need a good forecast.

The three-way financial models that we build at Pro Veritate will help you understand the timing and amount of capital needed by your business to support your plan.

If you are a growing business you should Contact Us.  We can help.

Vaulting Ambition

When Vanity meets Reality

Posted by on Oct 19, 2017 in Growing with Confidence, Lessons from the Big End of Town

When Vanity meets Reality

In this article, written for Smart Company on behalf of the Association of Virtual CFOs I look at the lessons for owners of small and medium size business from Slater and Gordon’s spectacular growth and subsequent bust.

You’ll discover how tricky and expensive growth can be.

There’s a practical illustration on how to use your balance sheet to track the flow of funds through your business.

It’s a must-know technique for any owner of a small or medium size business wanting to grow their business with confidence.

I hope you enjoy the article, but more importantly, find it useful and illuminating.

If you are planning to grow your business, and would like to be confident that you’re on the right track, then please make contact.

I can help.

When Vanity meets Reality

Until the Pips Squeak

Posted by on Oct 16, 2017 in Drivers of Cash Flow, Working Capital

Until the Pips Squeak

This is the first article that I wrote on behalf of the Association of Virtual CFOs back in March 2016 and which was subsequently published by Smart Company.

It quantifies the amount of money Woolworths would inject into their cash flow by extending the time taken to pay their suppliers.

For business owners, this article is a great introduction to the importance of managing your working capital.

If you’re a business owner making a profit but feeling like you have no cash then the chances are your cash is being tied up in your working capital.

I hope you enjoy the article, and more importantly, find it useful and illuminating.

Lastly, if you’d like to turn your financial information into a source of competitive advantage, and grow your business with confidence, then please do make contact…I can make a difference.

Until the Pips Squeak.

It’s the Vibe (On Overtrading) – Part 3

Posted by on Apr 28, 2014 in Academic Research, Budgeting and Forecasting, Working Capital

It’s the Vibe (On Overtrading) – Part 3

In this final instalment on Overtrading I will look at the actions a business owner can take to remedy overtrading.

Have a Plan

Growth doesn’t happen by itself. There is activity that you, the business owner, is planning to follow in order to generate growth.

As such, you have the opportunity to plan at the outset for the resources you need to support your growth ambitions – be it more people, more equipment, more space or more cash.

You need to prepare a budget that identifies the expected financial impacts of your growth plan on your profitability, balance sheet and cash flow.

By having a plan and a budget you have operational and financial reference points against which to track your actual progress. It will quickly become apparent whether you are growing quicker or slower than expected and whether the actual operational and financial impacts are within or outside expectations. This frame of reference will help you decide what changes you need to make to your plan and the required resources to support the revised plan.

If you haven’t planned, and find yourself in an overtrading situation, then these are the steps you need to take:

Self Help First

Firstly, you need to stay on top of your working capital.

This means being disciplined with invoicing and following up with a good collection process.

It means identifying slow-moving stock and considering whether it should be discounted for a quick sale to bring in cash.

It could mean asking creditors for a temporary extension to your payment arrangements.

Essentially, you need to be doing everything possible to increase the amount of cash coming into your business whilst slowing the outflow of cash as much as is commercially feasible. This will buy you time to reorganise the people and equipment resources needed to support your growth.

An Operational Plan Next

Secondly, you need to fix any operational problems.

Do you have all the fixed assets you need to support the level of growth being experienced? Is additional plant and equipment needed? How much will it cost, and how quickly can it be installed and operating?

Do you have road blocks in your processes and procedures that are slowing down your productive capabilities? Ask your employees about this – you might be surprised by their insight.

Do you have the right number of employees to support the new level of business activity? How long will it take to find and train new employees? Is there a need to use a labour hire company to help out on a temporary basis?

Is it possible to sub-contract out some of the work whilst your labour and equipment requirements are brought into line with the new level of business activity?

Is it possible to reschedule delivery time frames whilst these activities are undertaken?

Will the business continue to be profitable once the new resources are deployed?

A Cash Flow Forecast Last

The financial effects of the prior two steps now need to be incorporated into a cash flow forecast. It should be a weekly based forecast for the first three months, moving to a monthly based forecast for the following 9 months.

If the forecast indicates a need for additional finance you are now in a position to approach your financier with a cogent explanation of the issues you are facing, the steps being taken to rectify those issues and the short and medium term financing needs of your business.

If you can show a clear pathway out of your cash flow crisis then you have a chance that the finance needed will be approved, as it is only a temporary requirement.

If you can’t show a pathway out then you face a credibility issue with your financier – the precursor to a collapse caused by overtrading.

The Key Message

The key message for business owners (and their advisers) wanting to avoid the trap of overtrading is to plan for growth upfront, to track performance against plan, adjusting and revising the plan as dictated by the real world experience.

It’s the Vibe (On Overtrading) – Part 2

Posted by on Apr 17, 2014 in Academic Research, Working Capital

It’s the Vibe (On Overtrading) – Part 2

My first post on this topic dealt with the consequences of overtrading and the difference between business growth and overtrading.

This post will help an owner of a small or medium-sized business identify when their business is overtrading.

I think there are a number of qualitative and quantitative signals that help a business owner identify when growth has become overtrading.

Here’s what I would be looking out for:

Qualitative Factors

  1. A feeling of being overwhelmed by the volume of orders on hand;
  2. Increasing volume of customer complaints, or customer complaints when previously there were none;
  3. Rapidly changing priorities;
  4. Lack of time to concentrate on other (staff training, financial, etc) aspects of the business.

Quantitative Factors

  1. Negative operating cash flow*;
  2. Rapid increase in net working assets#;
  3. Rapid lengthening of the Cash Conversion Cycle#;
  4. Rapid lengthening Debtor Days and Stock Days#;
  5. Extending Creditor Days# beyond agreed payment terms;
  6. Insufficient funds in the bank account to meet normal operating expenses.

* A quick way to measure Operating Cash Flow is to calculate the Net Profit after Tax for the period, less dividends paid in the period, plus depreciation expensed in the period less the increase / plus the decrease in Net Working Assets over the period.

# Follow the link to find out what these terms mean and how to use your financial information to measure and track them over time.

As the business owner generally works in the business I think it most likely that they will notice the qualitative factors first. As a business adviser often sees the business from a financial perspective I think it most likely that they will notice the quantitative factors first.

In isolation, I think of these factors as trip-wires. They alert the business owner to the danger that growth is becoming overtrading. So, whenever one of these wires is tripped, the business owner (or their adviser) should take a hard look at whether other signals are also present. For example, a business owner feeling overwhelmed by the volume of work should take a hard look at what is happening to the working capital of their business. Similarly, a business adviser seeing a trend of negative operating cash flow should ask the business owner about the volume of work, level of complaints, etc.

If only one type of factor is evident (ie: either qualitative or quantitative, but not both) then overtrading may not be an issue. However, I think overtrading is definitely occurring when both qualitative and quantitative factors are evident. 

So, here is the message for business owners (and their advisers): By knowing the difference between growth and overtrading, and the signals that help identify overtrading, a business owner (or their adviser) is in a position to take action to mitigate the damage caused by overtrading.

My next post, which will be the last on this topic, will look at some of the responses a business owner can take to remedy overtrading and return to growth.

It’s the Vibe (On Overtrading)

Posted by on Apr 11, 2014 in Academic Research

It’s the Vibe (On Overtrading)

Do you remember Dennis, suburban solicitor and defender of the common man from the 1997 movie, “The Castle”?  Hopelessly out of his depth, he represents the Kerrigan family in court, to save their home from compulsory acquisition. In making his closing argument, Denis utters these immortal words “…in summing up, it’s the constitution, it’s Mabo, it’s justice, it’s law, it’s the vibe and uh, that’s it, it’s the vibe”.

I was reminded of that scene the other day, when I found myself musing over the difference between growth and overtrading. The train of thought had popped into my head because I have recently been helping owners of small and medium-size businesses that are undergoing rapid growth. I first heard the term “Overtrading” in 1988-89, just prior to the last prolonged recession in Australia. Whilst the “vibe” of the term was always clear, nobody I was working with at the time, or since, could cogently define overtrading for me.

Now, SME owners generally want to grow their business, but overtrading can quickly become fatal for a small or medium-sized business with only limited access to new capital (ie: new debt or new equity). In a 2011 research paper by Johan Van Der Spuy and Gideon Nieman, both of the University of Pretoria, they cite South African based research from 2007 where overtrading is listed as a cause of bankruptcy in 47% of cases.

With these thoughts in my head, I wondered, when does business growth morph into overtrading? What signs will help the owner of a small or medium-size business know that they are overtrading? And, how can the owner rectify overtrading?

In this article, the first of three, I will offer the SME owner (and their advisers) an answer to the first question. The second will help the SME owner identify when they are overtrading before it becomes fatal, and the third will set out for the SME owner the actions they can take to mitigate the effect of overtrading.

There is very little research on overtrading, other than the paper I mentioned earlier. In it were a couple of comments that I found particularly helpful in establishing a definition for overtrading:

  1. Overtrading…is the rapid growth of a business in which such strain is placed on the business’s capacity and/or resources, that when something (small) goes wrong the entrepreneur cannot deliver and problems grow in frequency.
  2. The…sustainable growth rate of a business, is the rate at which a company can grow without creating a cash flow problem.

The message for an SME owner (and their advisers) is that overtrading is incredibly dangerous to their business. It occurs when growth reaches a pace that overwhelms the physical resources of their business such that the quality of the product(s) or service(s) provided suffer and/or when growth reaches a pace that overwhelms the financial resources of the business creating cash flow problems.

Join me in my next post to find out how to recognise the symptoms of overtrading before it fatally damages your business.